Chapter 2—Purchasing Management

TRUE/FALSE

1. Purchasing can be broadly classified into two categories: merchants and industrial buyers.

2. Merchants primary task is to purchase raw materials for conversion purposes.

3. A low ROA suggests that management is capable of generating large profits with relativiely small
investments.

4. The procedures for public procurement differ from the private sector.

5. Cost savings is an advantage of using an e-procurement system.

6. The goal of a good purchasing system is to ensure efficient information transitions between the
materials users, the purchasing personnel, and the suppliers.

7. The purchase order is NOT a legally binding contract until it is accepted by the supplier.

8. A material requisition and a purchase requisition are the same thing.

9. A follow-up is considered a reactive approach to speed up an overdue shipment.

10. Procurement credit cards can be used for small purchases including meals, lodging, and travel
expenses.

12. Blank check purchase orders, Corporate purchasing cards, Petty cash, and Open-end purchase orders
are all possible alternatives to dealing with small value purchases such as those for office supplies.

13. Generally, firms outsource noncore activities while focusing on core competencies.

14. If the break-even point in a typical make-buy scenario is 19,000 units and 10,000 units are required by
the firm, then the firm should choose to make the units.

15. A reason for making items instead of buying them would include better quality control.

16. The Total Cost of Ownership Concept does NOT include quantitative factors.

17. The total cost analysis demonstrates how other costs besides the unit cost can affect purchase
decisions.

18. The possibility of events like strikes, assembly line breakdowns, and natural disasters are all reasons a
company should favor using a single supplier.

19. Decentralized purchasing is the practice where individual, local purchasing departments throughout a
single corporation make their own, individual purchasing decisions to fulfill their individual local
needs.

19. NAFTA and the WTO are trade organizations seeking to reduce tariff and non-tariff barriers among its
member countries.
 20. Foreign suppliers located farther away may be able to deliver goods faster than domestic suppliers due
to more efficient transportation and logistical systems.

MULTIPLE CHOICE

1. The primary goals of purchasing include all EXCEPT:

a. Secure materials at the lowest cost
b. Maximize customer satisfaction
c. Improve the quality of finished goods produced
d. Ensure the highest quality raw materials are purchased
2. Which of the following refers to the measurement of the impact of change in purchase spend on a
firm’s profit before taxes, assuming gross sales and other expenses remain unchanged?
a. Break-Even Analysis
b. Profit-Leverage Effect
c. Direct Offset
d. Leveraging Purchase Volume

3. When calculating Return on Investment, current assets include:

a. Cash, Accounts Receivable, and Inventory
b. Cash, Accounts Receivable, and Equipment
c. Accounts Receivable, Equipment, and Real Estate
d. Equipment, Buildings, and Real Estate

4. Inventory Turnover can be calculated by:

a. Ratio of cost of goods sold over average inventory cost
b. Ratio of average inventory cost over cost of goods sold
c. Ratio of inventory days in stock over average inventory cost
d. Ratio of average inventory cost over inventory days in stock

5. Which type of requisition is used for materials and standard parts that are requested on a recurring
basis?
a. Open requisition
b. Blanket requisition
c. Traveling requisition
d. Recyclable requisition (Cyc-Rec)

6. A form of purchasing that is placed directly to the supplier and suitable when firms use the same
components to make standard goods over a relatively long period of time is referred to as:
a. Material requisition
b. Purchase requisition
c. Planned order release
d. Traveling requisition

7. When a product is purchased which is complicated or highly technical a ______________may be

issued instead of a request for quotation.
a. Request for proposal
b. Purchase order
c. Contract for sale
d. Sales order
 8. Benefits derived from implementing e-procurement systems include all of the following EXCEPT:
a. Allows buyers to submit bids and suppliers to respond to those bids in real time
b. Increases the accuracy in communication between buyers and suppliers
c. Creates numerous additional job opportunities in the purchasing department
d. Tracking bids and transactions is easier and faster
9. While most public procurement is focused on goals like those of purchasing departments in the private
sector, U.S. federal government purchases must comply with the:
a. Services and Materials Acquisition Act
b. Fair Standards and Equitable Purchases Act
c. Federal Code of Conduct for Procurement
d. Federal Acquisition Regulation

10. Petty cash is being phased out in favor of:

a. Hard cash
b. A blank check
c. P-card
d. Score-carding
11. Blanket or open-end purchase orders are suitable for buying
a. Computers
b. Heavy equipment
c. Custom built components
d. Office supplies

12. Which of the following is a reason small value purchases are handled differently?
a. To give the buyer additional supplier choices
b. To obtain a higher quality product
c. To have better tracking of material usage
d. To control unnecessary administrative costs

13. Which of the following illustrates Forward Vertical Integration?

a. Microsoft starting a new division that designs and manufactures clothing
b. Ford automotive buying additional machines for production
c. Subway sandwich company buying a bakery to make the bread for their sandwiches.
d. Sony buying trucks to deliver their finished goods inventories to their customers'
warehouses

14. Which of the following would be a good reason to outsource (buy) versus making?
a. To utilize existing capacity within a company's own firm
b. A firm lacks the technology or expertise to produce an item
c. To have more direct control over the design and production of an end item
d. No competent supplier presently produces the needed item

15. Given the following make-buy information, what would be the break-even point?

Make Option Buy Option

Fixed Costs $5500 $1500
Variable Costs $ 4 $ 9

a. 1200 units
b. 1708 units
c. 800 units
 d. 460 units

16. Given the following make-buy information, what would be the break-even point?

Make Option Buy Option

Fixed Costs $16000 $1400
Variable Costs $ 6 $ 10

a. 9170 units
b. 3650 units
c. 1040 units
d. 2750 units

17. As firms seek to improve the products they offer to the market, companies are seeking help from their
suppliers in new product design and development through:
a. Supplier certification programs
b. Manufacturer certification programs
c. Early supplier involvement
d. Total Cost of Ownership initiatives

18. Firms can use total cost analysis to:

a. See how efficiently management is using its total assets to generate profits
b. Select the most cost-effective supplier
c. Show how many times a firm’s inventory is utilized and replaced over an accounting
period
d. Brainstorm and isolate the causes of a problem

19. Total Cost of Ownership does NOT consider which of the following factors?
a. Purchase order costs
b. Freight costs
c. Payment terms
d. Tooling costs

20. The total cost of ownership for Supplier A is $2,670,000. The total cost of ownership for Supplier B is
$1,750,000. The total cost of ownership for Supplier C is $2,990,000. Using Total Cost Analysis, it
will be more cost-effective to use
a. Supplier A
b. Supplier B
c. Supplier C
d. Cannot be determined

21. Which of the following is a reason for favoring single sourcing?

a. Encourages competition among suppliers
b. Spreads the risk of supply interruption
c. Reduces variabilities in quality levels
d. Reduces information about new processing technologies

22. Which of the following is a reason that single sourcing is considered risky/bad?
a. There could be supplier interruptions due to political instability
b. It could establish close relationships with the supplier
c. Larger orders make quantity discounts more likely
d. Decreases the item to item quality variability of items purchased
 23. Which of the following is an advantage of a centralized purchasing department?
a. Less bureaucracy
b. More frequent shipments
c. Specialization
d. Closer contact between buyer and user

24. Which of the following statements is FALSE?

a. Centralized purchasing is where individual, local purchasing departments, such as at the
plant level, make their own purchasing decisions.
b. Electronic procurement systems can aid a company in saving both time and money.
c. More than 50% of each sales dollar typically goes towards covering supply chain costs.
d. If a firm lacks the technology to make a required component they will need to consider
buying/outsourcing.

25. Which of the following is NOT a potential challenge for global sourcing?
a. Long delivery lead times
b. Costs involved in selecting foreign suppliers
c. Relaxed trade barriers
d. Labor and legal problems
26. Which of the following is NOT a form of countertrade?
a. Barter
b. Kaizen blitz
c. Offset
d. Counterpurchase

27. Which of the following NOT a reason firms are expanding their supply bases to include foreign
suppliers?
a. Lower shipping rates due to lower tariffs
b. Lower product cost
c. Better product quality
d. Overseas supplier holding the patent to the product

SHORT ANSWER

1. When using the Total Cost of Ownership concept, explain how a supplier with a higher unit price and
higher tooling cost can end up being more cost effective than another supplier with a lower unit price
and tooling cost.

2. Use what you understand about the outsourcing decision (Make vs. Buy) to answer this question. List
and explain three reasons a restaurant might decide to buy pre-made desserts from a supplier rather
than making the goods from scratch.

3. Answer the questions that follow, based on the diagram provided below
 $6,000

$5,000

$4,000

Cost $3,000

$2,000

$1,000

$0
0 100 200 300 400 500 600
Quantity

Buy Option

a. What are the fixed costs for the buy decision?

b. What is the breakeven quantity for the two options illustrated?
c. At Q = 300, would you choose the make or buy option? Why?
d. At Q = 200, what will be the total cost associated with the best decision at this quantity?

4. Global sourcing has become commonplace. Many companies now consider expanding their supply
base to include foreign suppliers. List three reasons why companies choose to source globally.

ESSAY

1. The BOEHM Cell Phone Company has developed a new series of phones that it plans to bring to the
market in the next 18 months. Management is considering whether to produce the product in-house or
to contract out the purchasing and manufacturing of their new cell phones.

Provide FOUR conditions that would favor outsourcing and FOUR conditions that would favor
making the cell phones in-house.

2. Under which conditions would you most likely utilize a centralized purchasing system? List two
advantages that would be gained by utilizing a centralized purchasing system.

Under which conditions would you most likely utilize a decentralized purchasing system? List two
advantages that would be gained by utilizing a decentralized purchasing system.

3. The term Supply Management is used to describe responsibilities above and beyond those of
traditional purchasing. What are three of these key activities and why are they considered important to
Supply Management?

4. Use the following information to determine which supplier for steering wheels is more cost-effective
using total cost analysis. Late delivery of the component results in 50% lost sales and 50% back orders
of finished goods.
Table 1
Order lot size 400
Annual Requirements 4,800 units
Weight per steering wheel 20 pounds
Order processing cost $125
Inventory carrying rate 20% per year
Cost of working capital 10% per year
Profit margin 20%
Price of finished golf cart $5,000
Back order cost $15 per unit

Table 2
Unit Price Supplier A Supplier B
1 to 999 units/order $48 $47
1000 to 2,999 units/order $47 $46
Tooling cost $1000 $1000
Terms 2/10 net 30 1/10, net 30
Distance 120 miles 100 miles
Supplier Quality Rating (defects) 3% 2%
Supplier Delivery Rating (late) 1% 2%
Here is the freight rates for
Truckload (TL ≥ 40,000 lbs): $0.90 per ton-mile
Truckload Less-than-truckload (LTL): $1.10 per ton-mile
Note: per ton-mile = 2,000 lbs. per mile; number of days per year = 365